Definition
Convenience Yield
Convenience yield is the implicit benefit of physically holding a commodity rather than a futures contract, such as ensuring supply or meeting unexpected demand.
A factory that needs copper on hand to keep production running values having the metal physically, even though storage costs money. This intangible benefit is the convenience yield, which offsets storage costs in commodity pricing.
When convenience yield is high, often during shortages, futures can trade below spot (backwardation) because holding the physical good is so valuable. It helps explain why commodity curves shift between contango and backwardation as supply tightens or eases.
Related terms
- Spot vs Futures (Commodity)The spot price is for immediate delivery of a commodity, while the futures price is agreed today for delivery later; the gap reflects storage, financing and convenience costs.
- Contango / BackwardationContango is when futures prices are higher than spot (upward-sloping curve), and backwardation when they are lower (downward-sloping), reflecting storage costs versus supply tightness.
- Cost of CarryCost of carry is the net cost of holding an asset to a future date, comprising financing cost less any income, and it determines the fair-value difference between a futures price and the underlying spot price.
- Commodity HedgingCommodity hedging uses futures or options to lock in input or output prices, protecting producers and consumers from adverse moves in commodity prices.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.